TOPIC 3

THE ISLAMIC ECONOMIC

SYSTEM
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TOPIC OUTLINE
1.ECONOMIC SYSTEM
2.CHARACTERISTICS OF
ISLAMIC ECONOMIC
SYSTEM (ES-i)
PROPERTY OWNERSHIP
MOTIVATIONS/INCENTIVES
DECISION MAKING
COORDINATION MECHANISMS
ROLE OF GOVERNMENT

1. ECONOMIC SYSTEM

WHAT IS A SYSTEM?

Definition

A set or assemblage of things connected or

interdependent, forming a complex unity
Different entities behaving in a particular way in
a coordinated manner
A whole composed of parts in an orderly
arrangement according to some plan or a
scheme

Components of a system

Entities/components/groups that are working

together
Mode of interaction - relationship among
components

WHAT IS A SYSTEM?

Society organizes itself according

to its values, culture, worldview
and its sources of authority

Institutions, plans and

meaning/priorities of goals differ
between societies

Societies have legitimate rights to

come up with their own version of

ECONOMIC SYSTEM
(ES)

Definition:

Any combination of entities that interact with

one another according to a particular plan
Goal: to fulfill economic objectives of a
society
Different priorities in set of economic goals
lead to different structure of operational
principles.

Approaches to categorize ES
1)Theoretical approach:
-

based on theories that explain the microfoundation of economic agents activity of

ECONOMIC SYSTEM (ES)

Approaches to categorize ES
2) Sectoral approach:
- based on type of real activities undertaken.
- eg. agriculture, manufacturing, services
3) Comparative/Traditional approach:
- based on the different philosophical foundation
- eg. capitalist, socialist, mixed economy

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COMPARATIVE/TRADITIONAL
APPROACH

Defines an ES in terms of key

characteristics or isms

Confined to major common isms such as

socialism, capitalism and feudalism.
Examples:

Socialism is defined in terms of public ownership of means

of production
Feudalism is associated with land ownership

Analyze different economic systems based

on common characteristics

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1.Philosophical foundations: laid down objectives and norms
for economic man
2.Operational principles: Constitute social, legal and

PHILOSOPHICAL
FOUNDATIONS

CONVENTIONAL ES

Derived from theories

developed by western
scholars

Adam Smith invisible hand

Joseph Schumpeter creative
destruction
Jeremy Bentham max. pleasure;
min. pain
Max Weber protestant ethics in

PHILOSOPHICAL FOUNDATIONS
CONVENTIONAL ES
Specific philosophical foundations:
1.

2.
3.
4.
5.

Concept of scarcity: nature is niggardly and

human wants unlimited
Self-interest: priority to individual goals
Absolute freedom: survival of the fittest
Materialism and utilitarianism
Positivism (science) versus norms (religion)
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ES-i

PHILOSOPHICAL
FOUNDATIONS

Derived from Quran

Prayers, belief & economics:

inseparable
From Surah Hud: 84-87 story of
Prophet Shuaib (pbuh):
dubbed as Prophet of
Economics
vs. Madyan people who did
not:
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submit to Allah
give full measure & weight

PHILOSOPHICAL
FOUNDATIONS

Specific philosophical foundations:

1.

2.

3.

4.

Tawhid: Accepting Allah as the only

sovereign power
Ibadah: Any act must be within
shariah boundries to seek Allahs
pleasure
Khilafah: Vicegerency, man
recognizes his duty as servant of God
Tazkiyyah: Process of economic
activity must be seen as a process
that purifies soul

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OPERATIONAL
PRINCIPLES

ES-i
Philosophical foundations lead to
a set of operating principles
Specific operational principles:
1. Adl/Ihsan: adl means giving what is due,
Ihsan giving more than what is due
2. Takaful/Taawun: cooperation
3. Responsibility/accountability: individual
is responsible to society, but ultimately
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to Allah
4. Moderation: in consumption, production,
distribution

GOALS
ES-i
Directed towards achieving
maqasid al-shariah

Promoting virtues and

preventing harm
To achieve public welfare
(maslahah)
Socio-economic justice
Economic development
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Value-loaded

ISLAMIC ECONOMIC SYSTEM

WV
SYSTEMS
P

Phil

Op-P

Goals

- Tawhid
- Ibadah
- Khilafah
- Tazkiyah

- Adl/Ihsan
- Takaful
- Respty
- Accntty

- S-E Justice
- Econ Dev
- Efficiency
- Stability

2. THE ISLAMIC
ECONOMIC SYSTEM
(ES-i)
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CHARACTERISTICS OF ES
Philosophical foundations, operational
principles, goals are structured by
epistemology
Most economic systems have
structurally changed entirely due to
history and ideologies
ES-i aim: Thus, We have made of you
an ummah justly balanced. (Al16
baqarah: 143)
ES-i has permanent & changing

DISTINCT CHARACTERISTICS OF ES
Property
ownership

Motivation

Decision
making

Coordination

Role of
government

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ES: THE TWO EXTREMES

CHARACTERISTICS

CAPITALISM SOCIALISM

PROPERTY OWNERSHIP

Private

Public

MOTIVATION

Self-interest

Altruism

DECISION MAKING

Decentralized

Centralized

COORDINATION

Market

Planning

ROLE OF GOVERNMENT

Minimal

Focal

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1. PROPERTY
OWNERSHIP
Definition
Involving a system of rules of access to and
control of resources
Ownership of property; a bundle of rights
Rights that affect objects disposition/utilization

Varies according to society,

worldview, situations
Market economy features private enterprise
Planned economy is characterized by public
ownership
ES-i is mixed: Private and public (natural
resources, common and state)

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1. PROPERTY
OWNERSHIP

Components

Object:
anything that can be owned;
something of value permissible
and capable of being possessed.
Can be corporeal (having a
physical dimension) or
incorporeal (such as intellectual
property)
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Subject:

1. PROPERTY
OWNERSHIP
Components

Content:

Rights-to own, possess, use, priority,

exclusion, income, security, dispose;
bundle of rights differ, either
complete ownership or incomplete
Obligations/duties: not to abuse or
misuse, not to hoard, must meet all
obligations, etc. Usually moderating
factor between individual/societys
right

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1. PROPERTY
OWNERSHIP

Mal/amwal: mentioned 86 times in the

Quran
Refers to wealth, property, possessions, whatever
one possesses
Most versus deal with content aspect rather than
the object

Milkiyyah: To possess, control, have

power/authority over
Islamic principles:

Absolute owner of property is Allah: the

creator of everything
Man as khalifah and abd has relative and

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1. PROPERTY OWNERSHIP
Islamic principles:
Man is responsible to society and
accountable to God for his
property: property are trials and
man will be rewarded
Labor and need are both
legitimate bases for ownership
Both private and public property
are legitimate kinds of property in23
Islam

Ownership
Types
Private

Natural
Resources

Public

Common

State

PRIVATE PROPERTY
OWNERSHIP

No Quranic ayat or hadith prohibiting

it; thus, permissible (ibahah principle)
Complete or incomplete ownership
rights
Rights to own, possess, utilize,
priority, right to exclude others,
income from property, security of
property, compensation if
damaged/purchased, dispose

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PRIVATE PROPERTY OWNERSHIP

Completely

responsible to
society/state and accountable to
God

Conditions to maintain ownership are

permissibility, proper utilization,
constant utilization, meeting all
obligations (zakat)

Not meeting these conditions could

result in losing some or all rights eg.
land

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PUBLIC PROPERTY
OWNERSHIP
Based on hadith concerning water
(oceans), fire (source of energy),
herbage (forests, parks) and salt
(basic needs):
Should not be privately owned
Access to and control of property is
determined directly by reference to
public interest
Public interest is a major objective of

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PUBLIC PROPERTY
OWNERSHIP
2

categories

State-owned:

Has complete rights and can decide use

for public interest, even if it means giving
to private sector to manage
Example of corporatisation, privatization
of previously public property

Common:

Must be equally accessible to all

members of society
Public parks, beaches, etc

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2.
Market
INCENTIVES/MOTIVATIO
economy focuses on material
incentives, while planned
economy
N
concentrates on moral incentives

Material versus moral; cash versus medal

Discusses how to make subordinates act
in the way required
In ES-i, incentives are derived from
shariah; both moral and material
Hadith: The best that man can earn is
that resulting from his work.

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2.
INCENTIVES/MOTIVATI
How to make subordinates follow Quran and
ON
sunnah

Stems from Islamic worldview

Extended time horizon
Rational action includes spiritual benefits
Incentives and punishments include those of the hereafter
How to make one act based on rewards/punishment that he
cannot see

Since one willingly submits to God, one accepts

Islamic worldview and its implications for 30
economic behavior

3. ORGANIZATION OF
DECISION MAKING
Decentralized vs centralized
(democracy versus dictatorial)
Where decisions are made; upper level
or lower level of hierarchy
How decisions are made:
Principles (sources, derivation)
How they are implemented
To solve the problems in economics of what, how
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and for whom?

3. ORGANIZATION OF
DECISION MAKING
Islam

talks of shura - mutual

consultation between higher and
lower level

People voice their views before

decision makings are made

Decision must be within limits of

shariah

Eg. Prophet asked for opinions

Peoples participation in decision

making; no bias towards extreme

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4. COORDINATION
MECHANISM

Market versus Plan (Decentralized vs

centralized)
How decisions made are implemented, i.e.
signal sent to all levels of society
Real world always have some degree of
planning: central planning versus indicative
planning
9th Malaysia Plan (2006-2010)
RM220bn => construction of infra. (dams &
transportation)
10 MP (2011-2015) - new economic model

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4. COORDINATION
MECHANISMS
Islam basically supports a market
system
Based on a hadith reported by Tarmidzi
and Ibn Majah
Market in Islam must be reflecting the
norms, values in consumer and
producer behaviour
Different rules of the game govern
supply and demand

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Central role of state to ensure that rules

4. COORDINATION
MECHANISMS
To ensure the smooth functioning of
market needs the institution of al-Hisbah

Coordination & regulatory roles of alHisbah:

Right weights and measure
Checking business frauds
Correcting market imperfections
Hoarding
Unfair monopolies
Information monopoly
Essential goods supply and price
Ownership rights

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5. ROLE OF
STATE/GOVERNMENT
Other ES: emphasizes on the
relative size of governments
involvement in economy
ES-i: more concerned about the
nature or suitability of
governments involvement
ES-i: Neither strictly a guarding
state (in capitalism) nor

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5. ROLE OF
STATE/GOVERNMENT
Nature

of involvement:

To

create a conducive environment for Islamic

man
Political instill peace and stability in competition for
power

Economic support entrepreneurship and efficient

methods of production

Social avoid social tension and promote harmony in coexistence

Religious promote dawah , tarbiyyah and tadib efforts

Moral recognize & reward respectable icons

Legal introduce preventive rules and punish deserving

parties as a lesson to others

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5. ROLE OF
STATE/GOVERNMENT
Nature

of involvement:

Introduce

hisbah org. and

ensure its proper functioning
Regulator (guiding planner and
supervisor also)
Overriding

principle : Ensure
adl and ihsan
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ES: THE TWO EXTREMES VS. ES-I:

THE MIDDLE PATH
CHARACTERISTICS ES-i
PROPERTY OWNERSHIP Private & public
(i.e. mixed)
MOTIVATION

Self-interest &
altruism
(moral & material)

DECISION MAKING

Shura (mainly bottomup approach)

COORDINATION
MECHANISM

Market > plan

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